Why Sears Canada Can Legally Deny its Employees Severance

Former Sears Canada employees are left waiting in line with Sears’ other unsecured creditors for statutory severance pay.

One June 22nd, Sears Canada sought protection from its creditors under the Companies’ Creditors Arrangement Act, laying off 17% of its 17,000 employees and closing 59 store locations. Now, those 2,900 former employees are stuck in limbo, unsure if they will ever receive severance the law entitles them to claim.

Severance Law in Canada

In Canada, the provinces and territories have the authority to set laws governing the employment relationship. However, it’s the federal government that has jurisdiction over bankruptcy law.

Ontario’s Employment Standards Act gives workers the right to notice of termination or severance pay when the employer terminates their employment without cause. Courts can also grant an employee greater severance than the minimum standards based on a number of common law factors, including the employee’s age, years of service, and ability to find another job in the same field.

But that all goes out the window when bankruptcy law comes into play.

Companies can begin bankruptcy action under two laws in Canada: the Bankruptcy and Insolvency Act, or the Companies’ Creditors Arrangement Act. The BIA is more restrictive, as it involves an independent trustee who acts on behalf of all creditors, including former employees with severance claims. The CCAA, on the other hand, lets companies apply to the court for permission to suspend severance and other employee benefits without a trustee’s involvement.

That’s what Sears did in this case. Now, its former employees have to wait in line with Sears’ other creditors to see if they’ll get paid at the end of this so-called “financial restructuring”. And since the workers aren’t secured creditors, there’s no guarantee they’ll get the money they’re entitled to under the law.

Sears plans to continue operating its other stores during this period, and it has secured $450 million to help it re-brand in hope of bouncing back. However, it has also applied to stop paying benefits to its retirement plan that provides life insurance and medical/dental benefits to thousands of former Sears employees. On this, the court compromised; Sears has to continue paying until the end, at which point the retirees are left without benefits.

Fixing Broken Bankruptcy Laws

Not all companies take advantage of the CCAA to get out of paying its employees their dues. Target, for example, set aside a $70 million reserve fund to ensure its employees got severance when it sought bankruptcy protection in 2015. However, this event has demonstrated what many consider to be a gaping hole in Canada’s typically progressive employment laws.

Others have called on provincial and federal governments to act. Premier Kathleen Wynne said her government is saying “very close attention” to the Sears situation, but says there’s no real role the province can play in defending the workers. That’s because the law governing these proceedings, the CCAA, is a federal law. But Catherine Fife, an MPP from Kitchener-Waterloo, wants to see Wynne lobbying the federal government for change.